In this short, upbeat video the presenter (with colleague Sarah) walks lawyers and legal bookkeepers through the essential 3‑way bank reconciliation process that law firms need to stay compliant with state bar audit requirements. The video defines the three components of the reconciliation – the practice‑management/billing software (e.g., Clio or LeanLaw), the QuickBooks bank account, and the associated trust liability accounts – and explains how they must all balance. It demonstrates a practical workflow: pulling the client’s balance sheet, collapsing asset sub‑ledgers, rolling up trust accounts under a parent ledger, and matching the total liability balance to the reconciled bank balance. The presenter highlights common reasons the reconciliation can break down, such as unreimbursed wire fees, mis‑posted IOLTA interest, one‑way sync errors, archived accounts, or incorrect entries in the billing software. The narrative stresses that many firms lack proper documentation for a 3‑way reconciliation, which can jeopardize audit readiness, and argues that hiring a knowledgeable legal bookkeeper who understands both the software integrations and bar compliance standards is the most reliable solution. The video ends with a light‑hearted invitation to read the accompanying article (styled as a concert) and to subscribe for more content.
Chapters
This week's post is about the reconciliation process when you work with law firms. And I actually have embedded inside the article, so make sure you go down and read the article that's attached here because I had a little fun with it. I called it Balancing the Books with a Beat, and it's got a little bit of a theme of rock and roll, and it's just a fun video. It's not very long, but if you're If you're here and you're looking at the Accountant's Law Lab, maybe you just got your first attorney-client or maybe you've got a couple and you're really thinking, do I have this perfected? And I can tell you from experience that we've run into many law firms that we ask, do you have a 3-way bank reconciliation process with the past bookkeeper or past accounting firm? And they'll say, oh yeah, we've got everything. She reconciled or he reconciled everything. And then we ask for them to produce the documents to show the 3-way bank reconciliation. It falls on deaf ears. They don't have the document that you need, and a lot of the states require it. They don't actually require you to file it, but they want you to have it on at hand if they decide to do a random audit or something like that. It's part of your compliance work. So you might be new to this, and you might be thinking Well, what is a 3-way bank reconciliation? I, I can't imagine. It's 2 ways. It's the bank. And it's QuickBooks, right? Well, there is a 3rd piece. And I've had this argument with a couple of clients. They only get a 2-way bank reconciliation because they don't have that external software, or used properly, I should say. Maybe they have it, but they're not using it properly. So the 3-way is your, for example, Clio or LeanLaw. The QuickBooks bank account and the associated liability accounts that must balance, and also the bank account plus or minus any transactions in transit, which you're gonna have to call out. So that's your 3 parts. So you have to make sure that the law firm follows this order. And I can guarantee you, Sarah and I laugh about this because out of all the law firm work we've done, we've had this many clients actually be in compliance with the 3-way bank reconciliation. Mm-hmm. Yeah, one. We have a pretty good-sized firm now, and we've got a lot of clients, and we've met a lot of clients along the way, or potential clients, and we've only had one that was actually in compliance. Everybody else's books were incorrect. And it's really simple to do this. You actually get a client or pull up your client, pull up the balance sheet, start to group it by month, and collapse down a lot of the assets and things like that. Credit cards, accounts receivable, accounts payable. Collapse it down so you see the bank account, that's the trust. Now if they have multiple trusts, this is where you want to get that view where you've got a trust header saying trust accounts and then the trust bank accounts are subbed underneath because you want to see that total, but you also want to see it by bank. And then you want to drop into the liability account. When you get into the liability account, that's where you're going to look and see the total there. Mm-hmm. The total on the books in QuickBooks and the total of the bank account in QuickBooks that's been reconciled. They should equal— they should be the exact same number. So you're gonna roll up all those trust account subledgers into the parent ledger. And when you're looking at the total in the parent, that should equal the total in the bank account for its respective trust liability account. So if you have multiple banks, you should have multiple trust liability headers. All in all, you roll it all up like an accordion. You're rolling it all up, squeezing it together. It should all total the same. If it doesn't, something's wrong. And then you gotta do this action where you actually go back prior year, subaccount it down, check every month, hopefully find that month where it did align, and then you go forward from there to correct it. There's so many reasons why this can go awry. Maybe just the fact that you have the— a wire fee came out of the IOLTA and it was not reimbursed. Even the interest in the IOLTA account, if it's not properly stated, maybe it got put in an expense account instead of the IOLTA client account. You have to make an actual sub-liability account for IOLTA interest, and it should be an in-and-out transaction or a clearing transaction. But sometimes— Yeah. The bank sometimes doesn't take it back. That's a whole nother issue there. So you gotta make sure that you maintain compliance with the State Bar, and you want to make sure that you run that matter balances in Clio or run that report in LeanLaw that shows all the balances in LeanLaw, and that total should equal the total that you have on your books. If it's not correct there, then we know the issue lies in the software. That the client is using for billing. And that could be a matter of just somebody putting something in wrong. If it's lien law, a lot of times it could be somebody archived an account or it could be that they, it could be multiple, a lot of reasons. In Clio, it can be because they put the wrong amount in and you've got QuickBooks and Clio connected. Maybe it shot another transaction over because it's a one-way sync. There's just so many reasons. And if you want to have good clean records and stay in compliance, why you really wanna hire a bookkeeper to do this, it's why the The lawyers need to hire us to do it. And to be a good legal bookkeeper, you really need to know and understand how the software works and how this should be stated properly. So you've got those individual ledgers in case you're audited. Our firm has done— been on the other side of helping a client with an audit. We know exactly what the bar is looking for, and that's how we present our books. So we have it ready if we ever have that happen. So you want to have properly stated books. Okay. So I hope that kind of clears up. If you get a chance to take a look at it, it's a little bit more detail in the article, kind of showing you. And I had a little fun with the article, making it sound like it was a concert. And, and, you know, at the concert of 3-way bank reconciliation, trying to make 3-way bank reconciliations fun as much as I can. Actually, we think they're fun. Sarah and I think they're fun. Our staff thinks they're fun. We like to go and dig in, and we get— there's a lot of excitement and high fives when we figure it out. But On that note, I hope you all have a wonderful week, and don't forget to hit the subscribe button and follow for more. Bye now! Bye!
